Stabilization and adaptation in oil and gas investments

Abstract

contracts or other types of contractual relations. Two characteristics are common to these various agreements. Firstly, they are concluded by the investor with a State or a State entity, the latter being entrusted by the State with the task of administering in the public interest the country’s petroleum resources. 1 The second characteristic is their duration. By its nature, an investment implies the establishment of a relation with the territory of the host State by far exceeding that of a normal commercial contract between private parties. The very nature of the activity to be deployed by the investor under this type of arrangements, characterized by the various phases of the petroleum operations (exploration, development, production, transport, storage and other downstream activities), demands a long-term duration (normally, averaging 20‐30 years, or even more under the still surviving concession agreements). In the presence of the mentioned characteristics the question has been raised whether the need to protect the private investment makes it advisable to include a stabilization clause in the contract in order to ‘freeze’ the parties’ rights and obligations in the name of the sanctity of contracts (pacta sunt servanda) or whether an adaptation clause should be added providing for the renegotiation of the contractual conditions in the presence of a change of circumstances, in the name of the rebus sic stantibus rule. 2 In order to give an answer to these questions, a certain number of preliminary remarks are to be made. Stabilization and adaptation clauses are the two ways to achieve the parties’ common objective to allocate between them the risk inherent in a long-term transaction. Obviously, thereisalevelofriskthatexperiencedpartieshavetoaccepttobearalsointhiskindoftransactionstoensurecontractualstability.Accordingly,riskallocationclausesaretriggeredonly inthepresenceofsituationswhichthepartiesbelievetoexceedthelevelofacceptableriskin transactions of this nature. In the absence of a pre-determined level of such acceptable risk,